PPI turned negative on an annualized basis, but there is more to the inflation story than oil. The stronger dollar is exerting downward pressure on core inflation. This is evidenced by the 0.6% decline in core annualized PPI to 1.0%. The downward pressures might abate just a bit as the pace of the dollar’s rise could slow temporarily. However, several other central banks responded to the ECB’s measures by easing as well. This could put the pressure on the ECB to ease even more aggressively. Japan is unlikely to standby and lets the EMU take market share in the U.S. and could ease again (buy more equities?). Can Japan ease more than it already has? If Japan is stuck (we believe it is close), Japan might win the race to the bottom. It did have a 20 year head start after all.
To see a list of high yielding CDs go here.
This brings us to Europe. We view Europe as Japan Redux. Unless there are structural changes within the EMU, it could follow’s Japan’s path. Readers should keep in mind that benefits to Japanese and European risk assets are more technical and monetary than fundamental. Thus, corrections could occur should monetary stimulus underwhelm. Rather than piling into foreign markets, we suggest investors cautiously dipped their toes and only when it is suitable.
We have been asked by several readers about Petrobras (NYSE:PBR). The company is a mess. It is dealing with a corruption scandal and a plunge in oil prices. It is also dealing with a stronger dollar. Petrobras’s dollar-denominated debt has become more expensive as the USD has strengthened vs. the Brazilian real. If not for the fact that Petrobras is a national treasure for Brazil, we would probably have been more negative early on. However, we have been unconstructive on Brazil for more than a year.
Our advice for holders of Petrobras debt is that it is a speculative investment at the present time. Suitability has to be assessed for accounts holding the debt.